How Blockchain Could Revolutionize the Shipping Industry
Blockchain technology is seen as transformative through its power of slashing the costs of transactions and reshaping the economy - but how exactly will it change supply chains and the shipping industry?
Blockchain is thought to radically change the industry through significant cost savings, faster throughputs, higher security, improved traceability and transparency. It has the potential to rejuvenate the antiquated process of shipping, benefitting all members across supply chains.
But Wait. What Exactly is Blockchain?
To realize the true power of Blockchain technology, it is necessary to fundamentally understand what it is.
At its core, Blockchain is a technology that enables digital records of transactions or ledgers to be distributed and shared equally between entities in a secure and permanent way. The data is stored across multiple participants in a peer-to-peer network, so there is not a sole central repository that stores the data.
“Imagine a ledger that is duplicated thousands of times across a network of computers. Imagine that this network is designed to regularly update this ledger - that is the basic understanding of blockchain.”
The technology aims to create trust. Its records are thus time-stamped and tamper-proof so information could not be manipulated. Blockchain liberates data previously kept in safeguarded silos by facilitating the shift from a centralized to a decentralized and distributed system.
Delving into how businesses currently operate, the process of continuously recording transactions is a core function that is needed. By doing so, businesses could trace their past actions and provide guidance for future decisions. The major conundrum with the current process is that a master ledger for these transactions does not exist. Records of transactions are currently private and distributed across internal units and functions, which calls for the need of reconciliation between them. This inevitably slows down time and causes errors.
In a blockchain system, the records are duplicated and stored in a large network of identical databases. If a change occurs in one database, all other databases are updated simultaneously. This solves the major problem of the lack of a master ledger in a business, as records are permanently entered in all ledgers of transactions. Therefore, intermediaries and third party entities are not needed for the verification and reconciliation of records.
What Does this Mean for Supply Chains?
The maritime industry is highly complex and information-driven, where its supply chains consist of organizations that are connected and dispersed globally. Currently, most supply chain management and messaging softwares coordinate the logistics and flow of information across static supply chains. These systems are relevant for large vertically integrated companies that exist 30 years ago. The issue with these systems is that often times information is unsynchronized and only flows through one node at a time down the supply chain.
With the emergence of newer technologies and changing organizational behaviors, supply chains are no longer traditional single-line networks of manufacturers and suppliers. They have grown extensively to incorporate multiple parties working together to make many product variants. A single company could employ multiple contract manufacturers from the same sourcing pool to fulfil a wide range of distribution models, including both traditional brick and mortar stores to online consignment services. Supply chains have now also shifted to a more dynamic nature where product lifecycles are shorter and more intense.
Even with the transformation of supply chains, companies have not updated their technologies to adapt with this change. This is where blockchain comes in. With blockchain technology, the companies could restructure their supply chain models from a bilateral view to a fully integrated omniscient view, as blockchain provides transparency and accessibility to real-time data across supply chains.
What Does this Mean for the Shipping Industry?
The shipping industry still remains traditional as most of its processes are considered to be archaic. Most of its transactions involve heavy paperwork; this includes the Contract of the Carriage of Goods by Sea, Charter Agreements, Bills of Lading, Letters of Credit and other documents related to ports, vessels and cargoes. Most of these documents need to be transferred across the supply chain for certain processes like the delivery of cargo to take place.
For instance, the Bill of Lading is an important document that has to be transferred from the origin to the end of the shipping journey. The document is issued to a shipper at a loading port before proceeding through several banks to finally reach the receiver. This process is deemed to be time consuming that vessels commonly arrive at the final port of discharge even before the Bill of Lading has arrived.
In the shipping industry, blockchain technology will enable an open and transparent platform that would minimize paperwork - saving both costs and time. Blockchain has the power to rejuvenate an old-fashioned and antiquated process, benefiting every member across the supply chain network.
How Would it Transform the Industry, then?
To explore more on this idea, the potential benefits of blockchain technology for the shipping and trade industry are discussed below.
Faster, Cheaper and Leaner Logistics
It is estimated that 90% of world trade is transported annually by the international shipping industry. Blockchain technology can assist in minimizing frictions within the industry including improving procurement, transportation management, track and trace, customs collaboration and trade finance. Due to its high accessibility and transparency of data, blockchain enables information to flow seamlessly across supply chains to expedite the transfer of goods and services.
In the shipping industry, the tracking and traceability of containers is not a major problem as compared to the handling of paperwork that goes with these respective containers. Shipping giant Maersk identified that a single container requires stamps and approvals from 30 different people including customs, tax officials, and health authorities. A missing piece of paperwork could suspend a vessel in port for days potentially causing the transported goods to spoil.
In 2018, IBM entered a blockchain consortium with Maersk. The blockchain consortium developed a system where all documentation could be signed, verified and monitored by every member on the network. The pilot test of the system successfully tracked all paperwork for the transportation of flowers from Kenya to Rotterdam, that IBM proceeded to track containers with pineapples from Colombia and oranges from California. IBM is also currently working with Walmart and Tsinghua University in Beijing to track the movement of pork in China with blockchain.
Using blockchain to handle shipments, adverse effects from documentation fees, procedural delays, errors and information discrepancies could be mitigated. Companies have experienced cost savings upon two years after implementing blockchain into their businesses.
Furthermore, because information is readily available and accessible across supply chains, procedures which could normally take multiple days to execute would be completed within minutes. The fact that reconciliation of data is not needed due to lesser conflicts of integration, throughput and processing times will be much more time-efficient.
Improved Transparency and Traceability
As the data on a blockchain network is stored permanently and is highly accessible, the members of the supply chain are provided with more comprehensive track-and-trace capabilities. This includes access to information for quality control, location, and proof of legitimacy or authenticity of products.
In 2015, fast food chain Chipotle Mexican Grill faced an E. Coli bacteria outbreak that left 55 customers ill. The company depended on multiple suppliers to deliver the ingredients required for their products. At the same time, Chipotle lacked transparency and accountability between their suppliers. Unable to monitor their suppliers in real time, the company was not able to avert the contamination nor contain it effectively after the outbreak. This resulted in a tarnished reputation from the media, which led their share price to plummet by 42%, a three year low.
Blockchain might not have prevented the outbreak, but it could be used to rapidly identify and trace the source of the outbreak. Because of the decentralized nature of the network, not only could Chipotle track their products within their control but across the whole network, including both its vendors and stakeholders.
Blockchain technology is a highly effective means to connect people, orders, and payments in real-time. This simplifies the track-and-trace process for everyone to locate where exactly their shipment is and when it should arrive. Important documentation that accompanies shipments (like the BoL) would be available anytime for review to determine title of ownership, events in the chain of custody, and the location when issues during shipments arise.
Additionally, companies down the supply chain could utilize blockchain to provide proof of legitimacy for products, for instance in pharmaceutical shipments as shown in DHL and Accenture's serialization project above. Consumers could be aware of the origins of their products - if it is authentic or ethically sourced, or if it has been preserved with respect to the agreed conditions.
Automated Commercial Processes (Smart Contracts)
During a shipment, there may be discrepancies in the timing of payments between supply chain members. Suppliers politely urge customers to pay whilst customers try to delay payments by entering and processing invoices at a slow pace. Blockchain could eradicate this behavior by integrating delivery and payments in the form of smart contracts. The permanent information and real-time shipment data in blockchain systems could generate and enable these digital contracts.
Smart contracts automatically trigger digital invoices and payments between customers and suppliers through banks, as soon as a document such as a Notice of Readiness (NOR) is issued to the charterer or shipper. By automating commercial processes as soon as the specified conditions are met, efficiency across the settlement process is significantly boosted. This includes reducing working capital requirements, simplifying financial operations and trade finance, and minimizing disputes between entities.
The Bank of America Merrill Lynch (BofAML), HSBC and the Infocomm Development Authority of Singapore (IDA) are developing a system to implement blockchain to the paper-intensive Letter of Credit process in shipping. The system allows for trade deals and settlements to be processed automatically through smart contracts between exporters, importers and banks. In the prototype the consortium developed, all four parties were able to visualize data in real time on a mobile tablet.
Onboarding a carrier may not be an easy process. It involves validating and verifying the carrier’s safety ratings, insurance coverage, and ability to fulfil service level requirements. As the shipping industry is highly paper-based, shippers and brokers rely on carriers to provide this information in paper format.
The shippers and brokers usually have a pool of resources to validate the carriers and manage this information in a database. The main complication pertaining to this approach is that the data is not publicly available. Every other business must thus invest additional time and resources in onboarding the same carriers that have already been onboarded.
With the application of Blockchain, the information regarding a carrier's validity can be stored and shared on the network. Furthermore, rather than relying on internal functions of the business to validate carriers, the business could utilize the blockchain network to do so. This is done in a similar fashion as to how miners are rewarded, as network members could be incentivized to validate as many carriers as possible. This is a win-win solution as not only does the member receive rewards, but the whole public ledger receives information. This allows businesses to extract and consume data of carriers from the blockchain network without additional efforts and resources.
Internet of Things
Internet of Things (IoT) is a burgeoning topic in a wide spectrum of industries. As the number of connected devices continues to proliferate, the issue of security will always be important. Blockchain's decentralized and transparent nature could assist in tackling this issue. Furthermore, with the advent of newer technologies in the market, having IoT alone in a business has less of a competitive advantage and needs to be coupled with a technology such as blockchain to gain an edge.
The integration of both IoT and Blockchain could reap many benefits in supply chains and the overall shipping industry. IoT would enable manufacturers to use more sensors to capture real-time data and diagnostics of the vessel's performance during a voyage. The information could also be processed with machine algorithms to determine if a vessel requires maintenance. Blockchain would complement the process by providing a decentralized network of data that is tamper proof, allowing for safe and seamless communication between these smart devices.
Similarly, the integration of IoT and Blockchain technologies could ensure further quality control during shipments. For instance, temperature controlled reefer containers carrying perishable products like food, could be regulated and monitored throughout the voyage.